Treadstone prides itself on having a strong track record with the ATO and AusIndustry and going forward we want to make sure all our R&D Tax clients are properly prepared for any audit.
We would like to take this opportunity to remind all R&D Tax applicants about what makes up a strong and successful R&D claim. We would like to reinforce that record keeping is a basic requirement that need to be produced to the Commissioner of Taxation on request or your claim will be disallowed.
All your tax records, invoices, contracts and calculation sheets need to be kept for a minimum of five years.
Basic R&D Tax Record Keeping Requirements
Record keeping doesn’t have to be hard and can be helpful by encouraging business to allocate costs to strategic business priorities.
1. R&D Employee: Time Keeping
You must substantiate the time spent on eligible R&D projects by your employees. This can be done by keeping timesheets, worklogs, diaries, employment contracts, meeting minutes and contractor invoices. You will need to show that you kept records during the time you conducted R&D. Records must include:
- the name(s) and salaries incurred/paid
- the periods each employee was employed in respect of the R&D activities
- description of work undertaken in relation to R&D activities
Here are some apps for employee R&D time keeping:
- https://minutedock.com/ Integration with Xero available
- https://www.tsheets.com/ Integration with QuickBooks available
- https://www.myob.com/au/support/accountright Integration with MYOB available
- https://www.xero.com/au/features-and-tools/accounting-software/projects/time-tracking/ Xero Time Keeping App
Employees who are deemed 100% R&D do not necessarily require a timesheet, providing there is a signed employment contract valid for the period of claim in place and sufficient evidence to link them with the eligible R&D activities. The contact must include a detailed position description outlining the roles,responsibilities and activities carried out by the individual.
Those activities must be in line with the R&D activities submitted to AusIndustry. e.g. “developing and testing new software for R&D”.
2. R&D Contractors: Activity Description and IP
If an R&D activity is undertaken for you by a contractor then the documents relating to the contract and the R&D activities (for example, the project report and invoices) must contain:
- the date(s) the R&D activities are undertaken
- sufficient detail to ascertain the amount of expenditure incurred on the R&D activities as opposed to other goods or services being provided under the contract
- a description of the ownership of, or rights to, the resulting intellectual property as opposed to an end product.
When engaging with an external contractor conducing R&D activities on behalf of your entity, we strongly recommend you request:
- detailed invoices itemising R&D related work versus non-R&D related work (often we see invoices that lack a detailed breakdown, if you are provided with an inadequate invoice, immediately request a more detailed one)
- final signed agreements with correct dates in respect of the year of claim. Details on the contract should include the work that will be carried out, those activities undertaken should be able to have a direct link drawn to the core activates submitted to AusIndustry. e.g. Contract states ‘the development of XYZ formula’.
ATO Penalties and Consequences
It’s important to know that the ATO administers hefty penalties on businesses who cannot produce adequate records under review. The Commissioner may declare that you are not entitled to your R&D tax offset even if you have all your invoices. Further penalties and charges below may be placed on top of this based on your documentation including:
- 25% Base penalty for failure to take reasonable care to comply with tax law
- 50% Base penalty as a result of recklessness by a tax payer or their agent
- 75% Base penalty for intentional disregard of a tax law by tax payer or their agent.
- Shortfall Interest Charge (SIC) on the difference between your original refundable position and amended tax payable amount
How can we help you?
We can provide guidance for your record keeping helping you document your projects and identifying eligible R&D expenses. We can review your existing employee contracts, external contractor agreements and identify gaps for better records. We can show you some simple frameworks for collecting records without going to any trouble. Ask us for a timesheet template in excel format if you need one.
Email us and ask for an R&D compliance ready checklist to see where you can improve.